FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 1-7211
IONICS, INCORPORATED
(Exact name of registrant as specified in its charter)
Massachusetts 04-2068530
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
65 Grove Street
Watertown, Massachusetts 02472
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 926-2500
Former name, former address and former fiscal year, if changed since
last report: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceeding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
At September 30, 2002 the Company had 17,552,078 shares of Common Stock, par
value $1 per share, outstanding.
IONICS, INCORPORATED
FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 2002
INDEX
PAGE
PART I - FINANCIAL INFORMATION 2
Item 1. Financial Statements 2
Consolidated Statements of Operations
Three Months and Nine Months Ended September 30, 2002 and 2001 2
Consolidated Balance Sheets
September 30, 2002 and December 31, 2001 3
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2002 and 2001 4
Notes to Consolidated Financial Statements 5-14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15-22
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22-23
Item 4. Controls and Procedures 23
PART II -OTHER INFORMATION 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
CERTIFICATIONS 26-27
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
IONICS, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share amounts)
Three months ended Nine months ended
September 30, September 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
(as restated)
Revenues:
Equipment Business Group $ 41,437 $ 39,071 $ 112,630 $ 120,409
Ultrapure Water Group 25,169 32,835 75,354 104,501
Consumer Water Group 9,861 34,454 29,139 93,882
Instrument Business Group 6,990 6,033 20,344 20,264
Affiliated companies 3,330 5,900 9,022 15,873
------------- ------------- ------------- -------------
86,787 118,293 246,489 354,929
------------- ------------- ------------- -------------
Costs and expenses:
Cost of sales of Equipment Business Group 31,492 29,834 83,867 91,022
Cost of sales of Ultrapure Water Group 20,038 26,252 57,649 81,317
Cost of sales of Consumer Water Group 6,409 19,399 18,113 52,847
Cost of sales of Instrument Business Group 2,983 3,272 8,320 9,701
Cost of sales to affiliated companies 2,977 5,834 8,294 15,553
Research and development 1,617 1,496 4,832 4,795
Selling, general and administrative 21,346 25,655 62,746 81,736
------------- ------------- ------------- -------------
86,862 111,742 243,821 336,971
------------- ------------- ------------- -------------
Income (loss) from operations (75) 6,551 2,668 17,958
Interest income 807 176 2,668 1,147
Interest expense (338) (1,221) (1,274) (4,273)
Equity income 722 876 2,396 1,906
------------- ------------- ------------- -------------
Income before income taxes and minority interest 1,116 6,382 6,458 16,738
Provision for income taxes 474 2,170 2,647 5,691
------------- ------------- ------------- -------------
Income before minority interest 642 4,212 3,811 11,047
Minority interest in (earnings) losses (283) (1) (708) 328
------------- ------------- ------------- -------------
Net income $ 359 $ 4,211 $ 3,103 $ 11,375
============= ============= ============= =============
Basic earnings per share $ 0.02 $ 0.24 $ 0.18 $ 0.67
============= ============= ============= =============
Diluted earnings per share $ 0.02 $ 0.24 $ 0.18 $ 0.66
============= ============= ============= =============
Shares used in basic earnings per share calculations 17,552 17,449 17,537 16,983
============= ============= ============= =============
Shares used in diluted earnings per share calculations 17,597 17,626 17,694 17,132
============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
-2-
IONICS, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands, except share and par value amounts)
September 30, December 31,
2002 2001
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 143,950 $ 178,283
Short-term investments - 21
Notes receivable, current 4,978 4,892
Accounts receivable, net 99,211 118,255
Receivables from affiliated companies 26,904 17,199
Inventories:
Raw materials 19,426 20,047
Work in process 9,275 7,547
Finished goods 6,771 5,219
---------------- ----------------
35,472 32,813
Other current assets 12,555 11,031
Deferred income taxes 14,298 16,297
---------------- -----------------
Total current assets 337,368 378,791
Notes receivable, long-term 26,852 23,210
Investments in affiliated companies 22,645 23,798
Property, plant and equipment:
Land 6,340 6,288
Buildings 43,567 41,272
Machinery and equipment 267,745 243,964
Other, including furniture, fixtures and vehicles 31,103 29,938
---------------- -----------------
348,755 321,462
Less accumulated depreciation 172,677 154,430
---------------- -----------------
176,078 167,032
Goodwill 19,522 19,037
Deferred income taxes, long-term 12,487 12,643
Other assets 7,742 8,802
---------------- -----------------
Total assets $ 602,694 $ 633,313
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 1,651 $ 14,257
Accounts payable 27,076 34,640
Customer deposits 13,262 2,159
Accrued commissions 1,697 2,011
Accrued expenses 50,676 58,064
Income taxes payable 18,929 45,735
---------------- ----------------
Total current liabilities $ 113,291 156,866
Long-term debt and notes payable 11,078 10,126
Deferred income taxes 36,799 34,199
Deferred revenue from affiliated companies 3,762 3,360
Other liabilities 3,104 5,409
Commitments and contingencies
Stockholders' equity:
Common stock, par value $1, authorized shares: 55,000,000;
issued and outstanding: 17,552,078 in 2002 and
17,477,005 in 2001 17,552 17,477
Additional paid-in capital 190,360 188,555
Retained earnings 245,420 242,317
Accumulated other comprehensive loss (18,672) (24,996)
---------------- ----------------
Total stockholders' equity 434,660 423,353
---------------- ----------------
Total liabilities and stockholders' equity $ 602,694 $ 633,313
================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
IONICS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amountss in thousands)
Nine Months Ended
September 30,
----------------------------------
2002 2001
---------------- ----------------
(as restated)
Operating activities:
Net income $ 3,103 $ 11,375
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 17,334 24,774
Amortization of goodwill - 2,189
Provision for losses on accounts and notes receivable 791 2,255
Equity in earnings of affiliates (2,396) (1,906)
Changes in assets and liabilities:
Notes receivable (5,269) (5,988)
Accounts receivable and receivables from affiliated companies 11,945 2,438
Inventories (2,124) (9,065)
Other current assets 730 (819)
Investments in affiliated companies 3,937 903
Accounts payable and accrued expenses (16,747) (9,464)
Customer deposits 10,493 (1,536)
Income taxes (25,637) 1,656
Other (798) (457)
---------------- ----------------
Net cash (used in) provided by operating activities (4,638) 16,355
---------------- ----------------
Investing activities:
Additions to property, plant and equipment (24,526) (27,394)
Disposals of property, plant and equipment 1,782 1,617
Additional investments in affiliates - (5,479)
Acquisitions, net of cash acquired (1,035) -
Sale of short-term investments 90 425
---------------- ----------------
Net cash used in investing activities (23,689) (30,831)
---------------- ----------------
Financing activities:
Principal payments on current debt (73,764) (88,569)
Proceeds from borrowings of current debt 61,068 75,137
Principal payments on long-term debt (727) (1,158)
Proceeds from borrowings of long-term debt 1,334 250
Proceeds from issuance of common stock 60 21,814
Proceeds from stock option plans 1,661 4,872
---------------- ----------------
Net cash (used in) provided by financing activities (10,368) 12,346
---------------- ----------------
Effect of exchange rate changes on cash 4,362 (342)
---------------- ----------------
Net change in cash and cash equivalents (34,333) (2,472)
Cash and cash equivalents at beginning of period 178,283 25,497
---------------- ----------------
Cash and cash equivalents at end of period $ 143,950 $ 23,025
================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
IONICS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The consolidated quarterly financial statements of Ionics, Incorporated
(the "Company") are unaudited; however, in the opinion of the management
of the Company, all adjustments have been made that are necessary for a
fair statement of the consolidated financial position of the Company, the
consolidated results of its operations and the consolidated cash flows
for each period presented. The consolidated results of operations for the
interim periods are not necessarily indicative of the results of
operations to be expected for the full year or any future period.
The accompanying financial statements have been prepared with the
assumption that users of the interim financial information have either
read or have access to the Company's financial statements for the year
ended December 31, 2001. Accordingly, footnote disclosures that would
substantially duplicate the disclosures contained in the Company's
December 31, 2001 audited financial statements have been omitted from
these financial statements. These financial statements have been prepared
in accordance with the instructions to Form 10-Q and the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such instructions,
rules and regulations. These financial statements should be read in
conjunction with the Company's 2001 Annual Report as filed on Form 10-K
(the "2001 Form 10-K") with the Securities and Exchange Commission.
Certain prior year amounts have been reclassified to conform to the
current year presentations. As part of the Company's adoption of a matrix
business organization effective January 1, 2002, results associated with
the Company's trailer leasing and non-consumer bleach based chemical
supply businesses are included in the Ultrapure Water Group (UWG)
segment, rather than the Equipment Business Group (EBG) segment where
they had historically been presented. Segment information for all periods
has been presented to reflect these changes. See Note 5. In addition, the
consolidated quarterly financial statements now reflect as "affiliated
companies" revenues and costs derived from transactions with affiliated
entities in which the Company maintains less than a majority equity
interest (see Note 5 of Notes to Consolidated Financial Statements of the
2001 Form 10-K). These amounts had previously been reflected within the
reportable business segments. Shipping and handling costs are included in
revenue and cost of sales.
2. Commitments and Contingencies
Trinidad Project. In the second quarter of 2002, construction was
completed on the first four (out of five) phases of the Trinidad
desalination facility owned by Desalination Company of Trinidad and
Tobago Ltd. ("Desalcott"), in which the Company has a 40% equity
interest, and the facility commenced water deliveries to its customer,
the Water and Sewerage Authority of Trinidad and Tobago. In 2000, the
Company acquired 200 ordinary shares of Desalcott for $10 million and
loaned $10 million to Hafeez Karamath Engineering Services Ltd. ("HKES"),
the founder of Desalcott and promoter of the Trinidad desalination
project, to enable HKES to acquire an additional 200 ordinary shares of
Desalcott. Prior to those investments, HKES owned 100 ordinary shares of
Desalcott. As a result, the Company currently owns a 40% equity interest
in Desalcott, and HKES currently owns a 60% equity interest in Desalcott.
The Company records 100% of any net loss and 40% of any net income
reported by Desalcott. In periods in which Desalcott has an accumulated
loss (as opposed to retained earnings), the Company records 100% of any
net income of Desalcott up to the amount of Desalcott's accumulated loss,
and 40% of any net income thereafter.
The Company's $10 million loan to HKES is included in long-term notes
receivable on the Company's consolidated balance sheets. The loan bears
interest at a rate equal to 2% above LIBOR, with interest payable
starting October 25, 2002 and every six months thereafter and at
maturity. Prior to maturity, however, accrued interest payments (as well
as principal payments) are payable only to the extent dividends or other
distributions are paid by Desalcott on the ordinary shares of Desalcott
owned by HKES and pledged to the Company. Principal repayment is due in
14 equal installments commencing on April 25, 2004 and continuing
semiannually thereafter. The loan matures and is payable in full on April
-5-
25, 2011. The loan is secured by a security interest in the shares of
Desalcott owned by HKES and purchased with the borrowed funds, which is
subordinate to the security interest in those shares in favor of the
Trinidad bank that provided the construction financing for Desalcott. In
addition, any dividends or other distributions paid by Desalcott to HKES
must be applied to loan payments to the Company.
In 2000, Desalcott entered into a "bridge loan" agreement with a Trinidad
bank providing $60 million in construction financing. Effective November
8, 2001, the loan agreement was amended to increase maximum borrowings to
$79.9 million. The Company is obligated to lend up to $10 million to
Desalcott as an additional source of funds for project completion costs
once all bridge loan proceeds have been expended. However, the bridge
loan of $79.9 million and the $20 million equity provided to Desalcott
(together with the additional $10 million dollars the Company is
obligated to lend to Desalcott) have not to provided sufficient funds to
pay all of Desalcott's obligations in completing construction and
commissioning of the project prior to receipt of long-term financing.
Included in Desalcott's obligations is approximately $24.2 million
payable to the Company's Trinidad subsidiary for equipment and services
purchased in connection with the construction of the facility. The
Company currently intends to convert $10 million of this amount into a
loan to Desalcott to satisfy the Company's loan commitment described
above. The terms of this loan are currently being negotiated with
Desalcott. The Company currently anticipates that Desalcott will pay its
remaining outstanding obligations to the Company's subsidiary partially
out of cash flow from the sale of water and from the proceeds from new
long-term debt financing. Desalcott has received proposals for new
long-term debt financing, including a term sheet and a draft term loan
agreement from the Trinidad bank which provided the bridge loan, which it
anticipates completing by year-end. Such new long-term debt financing may
not be completed on terms acceptable to Desalcott, or at all. Moreover,
although the Trinidad bank that made the bridge loan to Desalcott has not
required repayment of the bridge loan, which matured on September 1,
2002, pending completion of the long-term debt financing, there can be no
assurance that the bank will not exercise its rights and foreclose on its
collateral, in which event the Company's equity investment in, and
receivable from, Desalcott as well as the loan receivables from HKES
would be at risk.
Kuwait Project. During 2001, the Company acquired a 25% equity interest
in a Kuwaiti project company, Utilities Development Company W.L.L.
("UDC"), which was awarded a concession agreement by an agency of the
Kuwaiti government for the construction, ownership and operation of a
wastewater reuse facility in Kuwait. During the second quarter of 2002,
UDC entered into agreements for the long-term financing of the project,
and accordingly the Company commenced recognizing revenue in accordance
with American Institute of Certified Public Accountants Statement of
Position No. 81-1, "Accounting for Performance of Construction-Type and
Certain Construction-Type Contracts." At September 30, 2002, the Company
had invested a total of $1.6 million in UDC as equity contributions and
subordinated debt. The Company is committed to make additional
contributions of equity or subordinated debt to UDC of $15.9 million over
a two to three year period.
Israel Projects. The Company entered into agreements with Kibbutz Ma'agan
Micha'el, an Israeli cooperative society, and I.P.P.S. Infrastructure
Enterprises Ltd., an Israeli corporation, for the establishment of Magan
Desalination Ltd. ("MDL") as an Israeli project company in which the
Company has a 49% equity interest. In August 2002, MDL entered into a
concession contract with a state-sponsored water company for the
construction, ownership and operation of a brackish water desalination
facility in Israel. At September 30, 2002, the Company had made a nominal
equity investment in MDL, and had deferred costs of approximately
$645,000 relating to the design and development work on the project. The
Company currently anticipates that it will invest approximately $1
million in MDL for its 49% equity interest. MDL is currently seeking
approximately $7.7 million of debt financing for the project. If MDL is
unable to obtain such debt financing, the Company would expense all its
deferred costs relating to the project but would incur no other
liability, inasmuch as no performance bond has been issued for the
project.
In January 2002, the Company entered into agreements with Baran Group
Ltd. and Dor Chemicals Ltd., both Israeli corporations, giving the
Company the right to a one-third ownership interest in an Israeli project
company, Carmel Desalination Ltd. ("CDL"). On October 28, 2002, CDL was
awarded a concession agreement by the Israeli Water Desalination Agency
(established by the Ministry of Finance and the Ministry of
Infrastructure) for the construction, ownership and operation of a major
seawater desalination facility in Israel. At September 30, 2002, the
Company had not yet made any equity investment in CDL, and had deferred
costs of approximately $257,000 relating to the engineering design and
development work on the project. If CDL obtains long-term project
financing, the Company's total equity investment to be made in CDL would
-6-
be approximately $8 million. The timing of such investment will depend
upon the terms of the long-term financing agreement. Although the Company
currently anticipates that CDL will obtain long-term financing for the
project by the required date in April 2003, such financing may not be
obtained. If CDL is unable to obtain such financing, the Company would
expense all its deferred costs relating to the project and any investment
the Company may have made in CDL (estimated to be approximately $0.8
million by the time of the closing of the long-term financing), and could
incur its one-third proportionate share ($2.5 million) of liability under
a $7.5 million performance bond issued on behalf of CDL.
Aqua Cool Pure Bottled Water Operations Disposition. On December 31,
2001, the Company completed the sale of its Aqua Cool Pure Bottled Water
operations in the United States, United Kingdom and France to affiliates
of Perrier-Vittel S.A., a subsidiary of Nestle S.A. ("Nestle"), for
approximately $220 million, of which $10 million is being held in escrow
pursuant to the terms of the divestiture agreement. The amount of the
purchase price is subject to final adjustment based on the number of
customers and working capital levels of the transferred businesses, in
each case as determined in accordance with the divestiture agreement. The
process for determining the number of customers and working capital
levels, as well as any related purchase price adjustments, is under way.
In addition, Nestle is seeking payment of certain amounts under the
indemnification provisions of the divestiture agreement. While the
ultimate amount of purchase price adjustments or indemnification
payments, if any, cannot yet be determined with certainty, the Company
currently believes that the reserves it has established for purchase
price adjustments and the escrowed amount will be adequate in all
material respects to cover the resolution of these issues. Accordingly,
no additional provision for any liability that might result from any of
these matters has been included in the accompanying financial statements
for the current year.
Litigation. The Company is involved in the normal course of its business
in various litigation matters, some of which are in the pre-trial
discovery stages. The Company believes that none of the pending matters
will have an outcome material to its financial condition or results of
operations.
-7-
3. Earnings per share (EPS) calculations
(Amounts in thousands, except per share amounts)
For the three months ended September 30,
------------------------------------------------------------------------------------------------
2002 2001
------------------------------------------------ ---------------------------------------------
Net Per Share Net Per Share
Income Shares Amount Income Shares Amount
---------------- ------------- ------------- ------------- ------------- -------------
Basic EPS
Income available to
common stockholders $ 359 17,552 $ 0.02 $ 4,211 17,449 $ 0.24
Effect of dilutive
stock options - 45 - - 177 -
---------------- ------------- ------------- ------------- ------------- -------------
Diluted EPS $ 359 17,597 $ 0.02 $ 4,211 17,626 $ 0.24
================ ============= ============= ============= ============= =============
For the nine months ended September 30,
------------------------------------------------------------------------------------------------
2002 2001
------------------------------------------------ ---------------------------------------------
Net Per Share Net Per Share
Income Shares Amount Income Shares Amount
---------------- ------------- ------------- ------------- ------------- -------------
Basic EPS
Income available to
common stockholders $ 3,103 17,537 $ 0.18 $ 11,375 16,983 $ 0.67
Effect of dilutive
stock options - 157 - - 149 (0.01)
---------------- ------------- ------------- ------------- ------------- -------------
Diluted EPS $ 3,103 17,694 $ 0.18 $ 11,375 17,132 $ 0.66
================ ============= ============= ============= ============= =============
The effect of dilutive stock options excludes those stock options for
which the impact would have been antidilutive based on the exercise price
of the options. The number of options that were antidilutive for the
three month periods ended September 30, 2002 and 2001 was 1,824,017 and
1,416,317, respectively. The number of options that were antidilutive for
the nine month periods ended September 30, 2002 and 2001 was 1,444,467
and 1,448,317, respectively.
4. Comprehensive Income
The Company has adopted the Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," which establishes
standards for the reporting and display of comprehensive income and its
components. The table below sets forth the "comprehensive income" as
defined by SFAS No. 130 for the three and nine month periods ended
September 30, 2002 and 2001, respectively.
(Amounts in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- --------------------------------
2002 2001 2002 2001
-------------- -------------- --------------- ---------------
Net income $ 359 $ 4,211 $ 3,103 $ 11,375
Other comprehensive income
(loss), net of tax:
Translation adjustments 1,848 2,810 6,324 (2,274)
-------------- -------------- --------------- ---------------
Comprehensive income $ 2,207 $ 7,021 $ 9,427 $ 9,101
============== ============== =============== ===============
-8-
5. Segment Information
The Company has four reportable "business group" segments corresponding
to a "business group" structure. In 2002, the Company instituted a
matrix-type organization. As part of the matrix organization, the
Company's trailer leasing and non-consumer bleach based chemical supply
businesses which were included in the Equipment Business Group in prior
periods now are included in the Ultrapure Water Group. Segment
information for all periods has been presented to reflect these changes.
In addition, (i) the Company's Aqua Cool Pure Bottled Water business,
which had been reported as part of the Consumer Water Group, was sold to
affiliates of Nestle S.A. on December 31, 2001 and therefore does not
appear in 2002 operations; and (ii) the Company's majority-owned
Malaysian subsidiary, which had been reported as part of the Ultrapure
Water Group, was divested in May 2002 and is reflected in 2002 operations
through the divestiture date.
The following table summarizes the Company's operations by the four
business group segments and "Corporate." Corporate includes legal,
research and development expenses not allocated to the business groups,
certain corporate administrative and insurance costs, foreign exchange
gains and losses on corporate assets, as well as the elimination of
intersegment transfers.
For the three months ended September 30, 2002
----------------------------------------------------------------------------------------
Equipment Ultrapure Consumer Instrument
Business Water Water Business
Group Group Group Group Corporate Total
-------------- ------------- ------------ ------------- ------------ -------------
(Amounts in thousands)
Revenue - unaffiliated $ 41,437 $ 25,169 $ 9,861 $ 6,990 $ - $ 83,457
Revenue - affiliated 3,321 - 9 - - 3,330
Inter-segment transfers 349 269 - 530 (1,148) -
Gross profit - unaffiliated 9,945 5,131 3,452 4,007 - 22,535
Gross profit - affiliated 349 - 4 - - 353
Equity income 330 - 222 - 170 722
Income (loss) before interest,
tax and minority interest 1,656 (887) (829) 1,018 (311) 647
Interest income 807
Interest expense (338)
Income before income taxes
and minority interest 1,116
For the three months ended September 30, 2001
----------------------------------------------------------------------------------------
Equipment Ultrapure Consumer Instrument
Business Water Water Business
Group Group Group Group Corporate Total
-------------- ------------- ------------ ------------- ------------ -------------
(Amounts in thousands)
Revenue - unaffiliated $ 39,071 $ 32,835 $ 34,454 $ 6,033 $ - $ 112,393
Revenue - affiliated 5,899 - 1 - - 5,900
Inter-segment transfers 374 491 - 334 (1,199) -
Gross profit - unaffiliated 9,237 6,583 15,055 2,761 - 33,636
Gross profit - affiliated 66 - - - - 66
Equity income 548 1 227 - 100 876
Income (loss) before interest,
tax and minority interest 2,856 (800) 3,452 335 1,584 7,427
Interest income 176
Interest expense (1,221)
Income before income taxes,
and minority interest 6,382
-9-
For the nine months ended September 30, 2002
----------------------------------------------------------------------------------------
Equipment Ultrapure Consumer Instrument
Business Water Water Business
Group Group Group Group Corporate Total
-------------- ------------- ------------ ------------- ------------ -------------
(Amounts in thousands)
Revenue - unaffiliated $ 112,630 $ 75,354 $ 29,139 $ 20,344 $ - $ 237,467
Revenue-affiliated 9,010 - 12 - - 9,022
Inter-segment transfers 3,901 580 - 1,642 (6,123) -
Gross profit - unaffiliated 28,763 17,705 11,026 12,024 - 69,518
Gross profit - affiliated 722 - 6 - - 728
Equity income (loss) 1,675 7 725 - (11) 2,396
Income (loss) before interest,
tax and minority interest 5,979 (1,603) (3,576) 3,032 1,232 5,064
Interest income 2,668
Interest expense (1,274)
Income before income taxes,
and minority interest 6,458
Identifiable assets 321,550 139,705 52,256 30,198 36,340 580,049
Investment in affiliated companies 17,236 - 2,829 - 2,580 22,645
Goodwill 11,519 7,059 944 - - 19,522
Other intangible assets 103 1,307 95 289 52 1,846
For the nine months ended September 30, 2001
----------------------------------------------------------------------------------------
Equipment Ultrapure Consumer Instrument
Business Water Water Business
Group Group Group Group Corporate Total
-------------- ------------- ------------ ------------- ------------ -------------
(Amounts in thousands)
Revenue - unaffiliated $ 120,409 $ 104,501 $ 93,882 $ 20,264 $ - $ 339,056
Revenue - affiliated 15,708 - 165 - - 15,873
Inter-segment transfers 2,361 2,457 - 1,332 (6,150) -
Gross profit - unaffiliated 29,387 23,184 41,035 10,563 - 104,169
Gross profit - affiliatead 237 - 83 - - 320
Equity income (loss) 1,387 51 473 - (5) 1,906
Income (loss) before interest,
tax and minority interest 9,222 222 8,446 2,043 (69) 19,864
Interest income 1,147
Interest expense (4,273)
Income before income taxes,
and minority interest 16,738
Identifiable assets 283,667 149,197 141,252 30,034 (42,100) 562,050
Investment in affiliated companies 18,765 - 3,345 - 2,784 24,894
Goodwill 11,213 16,912 19,153 1,812 - 49,090
Other intangible assets 132 24 166 329 - 651
6. Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 143, "Accounting
for Obligations Associated with the Retirement of Long-Lived Assets."
SFAS No. 143 provides the accounting requirements for retirement
obligations associated with tangible long-lived assets. SFAS No. 143 is
effective for financial statements for fiscal years beginning after June
15, 2002. The Company has determined that SFAS No. 143 will not have a
material impact on its financial position and results of operations.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections as of April 2002." SFAS No. 145 rescinds FASB Statement No.
4, "Reporting Gains and Losses from Extinguishment of Debt," and an
amendment of that statement. SFAS No. 145 amends FASB Statement No. 13,
"Accounting for Leases," to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects
that are similar to sale-leaseback transactions. SFAS No. 145 also amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under
changed conditions. SFAS No. 145 is effective for financial statements
-10-
for fiscal years beginning after May 15, 2002. The Company does not
believe that SFAS No. 145 will have a material impact on the Company's
financial position and results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit
or disposal plan and nullifies Emerging Issues Task Force (EITF) Issue
No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)." SFAS No. 146 is to be applied
prospectively to exit or disposal activities initiated after December 31,
2002 and accordingly, the Company can only determine prospectively the
impact, if any, SFAS No. 146 would have on the Company's financial
position and results of operations.
7. Goodwill and Intangible Assets
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." This accounting standard addresses financial
accounting and reporting for goodwill and other intangible assets and
requires that goodwill amortization be discontinued and replaced with
periodic tests of impairment. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001, and is required to be applied at the
beginning of the fiscal year. A two-step impairment test is used to first
identify potential goodwill impairment and then measure the amount of
goodwill impairment loss, if any. The first step of the goodwill
impairment test, which must be completed within six months of the
effective date of this standard, identifies any potential goodwill
impairment. As of June 30, 2002, the Company completed the transitional
goodwill impairment test and determined that no adjustment to goodwill
was necessary.
In accordance with SFAS No. 142, amortization of goodwill was
discontinued as of January 1, 2002. All of the Company's intangible
assets are subject to amortization. The Company did not record any
reclassification of amounts of intangible assets into or out of the
amounts previously reported as goodwill.
The following tables reflect the adjustments to selected consolidated
financial information to present pro forma amounts which exclude
amortization of goodwill:
-11-
(Amounts in thousands, except per share amounts)
Three months ended Nine months ended
September 30, September 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------- -------------- ------------- --------------
Net income $ 359 $ 4,211 $ 3,103 $ 11,375
Goodwill amortization, net of tax - 534 - 1,718
------------- -------------- ------------- --------------
Adjusted net income $ 359 $ 4,745 $ 3,103 $ 13,093
============= ============== ============= ==============
Reported basic earnings per share $ 0.02 $ 0.24 $ 0.18 $ 0.67
Goodwill amortization, net of tax - 0.03 - 0.10
------------- -------------- ------------- --------------
Adjusted basic earnings per share $ 0.02 $ 0.27 $ 0.18 $ 0.77
============= ============== ============= ==============
Reported diluted earnings per share $ 0.02 $ 0.24 $ 0.18 $ 0.66
Goodwill amortization, net of tax - 0.03 - 0.10
------------- -------------- ------------- --------------
Adjusted diluted earnings per share $ 0.02 $ 0.27 $ 0.18 $ 0.76
============= ============== ============= ==============
(Amounts in thousands, except per share amounts)
For the years ended December 31,
--------------------------------------------
2001 2000 1999
------------- -------------- -------------
Net income (loss) $ 44,701 $ (1,870) $ 19,361
Goodwill amortization, net of tax 2,188 2,228 1,774
------------- -------------- -------------
Adjusted net income $ 46,889 $ 358 $ 21,135
============= ============== =============
Reported basic earnings (loss) per share $ 2.61 $ (0.12) $ 1.20
Goodwill amortization, net of tax 0.13 0.14 0.11
------------- -------------- -------------
Adjusted basic earnings per share $ 2.74 $ 0.02 $ 1.31
============= ============== =============
Reported diluted earnings (loss) per share $ 2.59 $ (0.12) $ 1.18
Goodwill amortization, net of tax 0.13 0.14 0.11
------------- -------------- -------------
Adjusted diluted earnings per share $ 2.72 $ 0.02 $ 1.29
============= ============== =============
The change in the carrying value of goodwill during the quarter ended
September 30, 2002, reflects the impact of foreign currency translation
adjustments and other adjustments.
The Company's net intangible assets included in "Other assets" in the
Consolidated Balance Sheets consist principally of patents and
trademarks. At September 30, 2002 and December 31, 2001, the net carrying
value of these intangible assets was approximately $1.9 million and $0.6
million, respectively. Intangible assets are amortized over a period
ranging up to 20 years. All intangible assets are amortized on a
straight-line basis. Amortization expense for intangible assets is
estimated to be approximately $0.5 million for each of the next five
years.
8. Restatement of Quarterly Financial Statements
On November 5, 2002, the Company announced that it will be restating its
consolidated financial statements for the three month periods ended March
31, 2002 and June 30, 2002 and the six month period ended June 30, 2002,
primarily as a result of intercompany transactions, including
transactions between the Company and its French subsidiary that were
erroneously recorded at the subsidiary level. The Company currently
intends to file amendments to its quarterly reports on Form 10-Q for the
periods ended March 31, 2002 and June 30, 2002 that include the restated
consolidated financial statements for the 2002 periods presented therein.
During the three month period ended September 30, 2002, the Company
recorded adjustments of approximately $90,000, which represented
immaterial corrections to prior year periods. The restatement will not
materially impact any items on the Company's consolidated balance sheets
-12-
as of March 31, 2002 and June 30, 2002. The effect of the restatement
adjustments are reflected in the results of operations for the nine
months ended September 30, 2002. The following table presents a summary
of the impact of the restatements on the Company's consolidated
statements of operations:
(Amounts in thousands, except per share amounts)
Three months ended March 31, 2002
---------------------------------------
As originally
reported As restated
----------------- -----------------
Revenues $ 80,341 $ 80,005
Costs and expenses 78,336 78,691
Income from operations 2,005 1,314
Income before income taxes
and minority interest 3,330 2,639
Provision for income taxes 1,132 876
Minority interest in earnings (261) (264)
Net income 1,937 1,499
Diluted earnings per share $ 0.11 $ 0.08
Three months ended June 30, 2002
---------------------------------------
As originally
reported As restated
----------------- -----------------
Revenues $ 79,321 $ 79,697
Costs and expenses 77,303 78,268
Income from operations 2,018 1,429
Income before income taxes
and minority interest 3,292 2,703
Provision for income taxes 1,119 1,297
Minority interest in earnings (79) (161)
Net income 2,094 1,245
Diluted earnings per share $ 0.12 $ 0.07
Six months ended June 30, 2002
---------------------------------------
As originally
reported As restated
----------------- -----------------
Revenues $ 159,662 $ 159,702
Costs and expenses 155,639 156,959
Income from operations 4,023 2,743
Income before income taxes
and minority interest 6,622 5,342
Provision for income taxes 2,251 2,173
Minority interest in earnings (340) (425)
Net income 4,031 2,744
Diluted earnings per share $ 0.23 $ 0.15
9. Acquisitions
In June 2002, the Company's Australian subsidiary acquired the business
and assets of Rudd Brothers, an Australian wholesale and retail
distributor of chemical and cleaning products, for approximately $0.6
million in cash. This acquisition has been accounted for under the
purchase method of accounting and, accordingly, the purchase price has
been allocated to the assets acquired based on their estimated fair
values at the date of acquisition. The assets acquired consist primarily
of property, plant and equipment, inventory, certain intangibles and
goodwill. The results of operations of Rudd Brothers have been included
-13-
in the Company's statements of operations from the date of acquisition.
Pro forma results of operations have not been presented, as the effect of
this acquisition on the financial statements was not material to the
Company's results of operations.
In July 2002, the Company acquired the business and assets of the EnChem
division of Microbar Incorporated. The purchase price was $0.4 million in
cash plus additional contingent payments to be made over a five-year
period based on the profitability of the acquired business. This
acquisition has been accounted for under the purchase method of
accounting and, accordingly, the purchase price has been allocated to the
assets acquired based on their estimated fair values at the date of
acquisition. The assets acquired consist primarily of patents and other
intellectual property, inventory and equipment, and are used for
wastewater treatment in the semiconductor industry. The results of
operations of the EnChem division have been included in the Company's
statements of operations from the date of acquisition. Pro forma results
of operations have not been presented, as the effect of this acquisition
on the financial statements was not material to the Company's results of
operations.
-14-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the consolidated financial
statements and the related notes thereto included elsewhere in this Form 10-Q
and the audited consolidated financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in our Annual Report on Form 10-K for the year ended
December 31, 2001, which has been filed with the Securities and Exchange
Commission. The following discussion and analysis describes material changes in
the Company's financial condition since December 31, 2001. The analysis of
results of operations compares the three and nine month periods ended September
30, 2002 with the comparable periods of the prior fiscal year.
Restatement and Reclassifications
On November 5, 2002, the Company announced that it will be restating its
consolidated financial statements for the three month periods ended March 31,
2002 and June 30, 2002 and the six month period ended June 30, 2002, primarily
as a result of intercompany transactions, including transactions between the
Company and its French subsidiary that were erroneously recorded at the
subsidiary level. The Company's consolidated financial statements as of and for
the three and nine months ended September 30, 2002 reflect the cumulative effect
of the restatement. See Note 8 to Notes to Consolidated Financial Statements.
As part of the Company's adoption of a matrix business organization structure
effective January 1, 2002, results associated with the Company's trailer leasing
and non-consumer bleach based chemical supply businesses are included in the
Ultrapure Water Group ("UWG") segment, rather than the Equipment Business Group
("EBG") segment where they had historically been presented. Segment information
for all periods have been presented to reflect these changes. Aggregate third
quarter 2002 revenues and gross margin for these businesses were $6.6 million
and $1.8 million, respectively, compared to revenues and gross margin of $6.2
million and $1.6 million, respectively, for the third quarter of 2001. Aggregate
revenues and gross margin for the first nine months of 2002 for these businesses
were $20.0 million and $5.5 million, respectively, compared to revenues and
gross margin of $18.8 million and $5.1 million, respectively for the first nine
months of 2001.
In addition, the consolidated financial statements now reflect as "affiliated
companies" revenues and costs derived from transactions with affiliated entities
in which the Company maintains less than a majority equity interest. These
amounts had previously been reflected within the four business segments.
Results of Operations
Comparison of the Three Months Ended September 30, 2002 with the Three Months
- -----------------------------------------------------------------------------
Ended September 30, 2001
- ------------------------
The Company reported consolidated revenues of $86.8 million and net income of
$0.4 million for the third quarter of 2002, compared to $118.3 million and $4.2
million, respectively, for the third quarter of 2001. Results for the third
quarter of 2001 included the operations of the Aqua Cool Pure Bottled Water
business, which was divested on December 31, 2001. In addition, results for the
third quarter of 2001 included the operations of the Company's majority-owned
Malaysian subsidiary, which was divested in May 2002.
Revenues. Total Company revenues for the third quarter of 2002 decreased 26.6%
to $86.8 million from $118.3 million from the year earlier period. Excluding the
third quarter 2001 revenues from the Aqua Cool Pure Bottled Water business of
$21.5 million and from the Company's Malaysian subsidiary of $7.4 million, third
quarter revenues for 2002 were down $2.5 million, or 2.8%, from the comparable
period in 2001.
EBG revenues of $41.4 million during the third quarter of 2002 represented an
increase of $2.4 million, or 6.1%, compared to revenues of $39.1 million for the
third quarter of 2001. These increases primarily resulted from increased sales
by the Company's European subsidiaries.
UWG revenues of $25.2 million for the third quarter of 2002 represented a
decrease of $7.7 million, or 23.3%, compared to revenues of $32.8 million for
the third quarter of 2001. This decrease primarily resulted from the absence of
revenues during the 2002 period from the Company's Malaysian subsidiary that was
divested in May 2002, which were $7.4 million in the third quarter of 2001.
-15-
Consumer Water Group ("CWG") revenues of $9.9 million during the third quarter
of 2002 represented a decrease of $24.6 million, or 71.4 %, compared to revenues
of $34.5 million for the third quarter of 2001. The decrease in CWG revenues
primarily resulted from the absence of revenues during the 2002 period from the
Company's Aqua Cool Pure Bottled Water business that was divested in December
2001, which were $21.5 million in third quarter 2001. In addition, CWG revenues
were adversely affected by lower demand for automobile windshield wash solution
and consumer bleach products due to the loss of several customers as a result of
price competition, as well as overall lower demand for the Company's home water
treatment equipment as a result of the general downturn in the economy.
Instrument Business Group ("IBG") revenues during the third quarter of 2002 of
$7.0 million represented an increase of $1.0 million, or 15.9%, compared to
revenues of $6.0 million for the third quarter of 2001. This increase was
primarily attributable to increased sales volume, particularly from customers in
the pharmaceutical industry and continued growth in after-market revenues.
Revenues from affiliated companies consists of revenues generated from entities
in which the Company has a less than majority equity interest. These revenues
amounted to $3.3 million for the third quarter of 2002 compared to $5.9 million
for the third quarter of 2001. The 43.6% decrease in affiliated companies
revenues primarily resulted from lower equipment sales to Desalcott as a result
of the substantial completion of the construction phase of the Trinidad
desalination facility.
Cost of Sales. The Company's total cost of sales as a percentage of revenue for
the third quarter was 73.6% in 2002 and 71.5% in 2001. As a result, the
Company's total gross margin was 26.4% in the third quarter of 2002 compared to
28.5% in the third quarter of 2001. EBG's cost of sales as a percentage of
revenue decreased to 76.0% in the third quarter of 2002 compared to 76.4% in the
third quarter of 2001, reflecting a change in product mix from lower margin
capital equipment to more profitable water supply and other products. UWG's cost
of sales as a percentage of revenue decreased to 79.6% for the third quarter of
2002 compared to 80.0% for the third quarter of 2001. Excluding the operations
of the Malaysian subsidiary (which was divested in May 2002) from the third
quarter of 2001 results, UWG's cost of sales as a percentage of revenue would
have been 78.0% during that period. The increase in UWG's cost of sales as a
percentage of revenue, as adjusted for the divestiture of the Malaysian
subsidiary, was primarily attributable to cost overruns on several projects.
Cost of sales as a percentage of revenue for CWG increased to 65.0% in the third
quarter of 2002 from 56.3% in the third quarter of 2001. Excluding the results
of the Aqua Cool Pure Bottled Water business, which was divested on December 31,
2001, cost of sales as percentage of revenue for the third quarter of 2001 would
have been 62.3%. The increase in cost of sales as a percentage of revenue as so
adjusted was primarily attributable to unabsorbed manufacturing overhead
associated with the decline in revenues in the consumer bleach business. IBG's
cost of sales as a percentage of revenue decreased to 42.7% in the third quarter
of 2002 from 54.2% for the year earlier period, primarily reflecting absorption
of manufacturing overhead as a result of higher sales volume. Cost of sales to
affiliated companies as a percentage of revenue decreased to 89.4% for the third
quarter of 2002 compared to 98.9% for the third quarter of 2001. This decrease
was primarily due to lower revenues from sales to Desalcott. For accounting
purposes, since the Company is deemed to have provided all of the equity funding
for Desalcott, profit is being deferred over the balance of the term of the
Trinidad concession agreement, which has resulted in lower margins on sales to
Desalcott.
Operating Expenses. Research and development expenses increased 8.1% to $1.6
million in the third quarter of 2002 from $1.5 million in the third quarter of
2001. Selling, general and administrative expenses decreased 16.8% to $21.3
million in the third quarter of 2002 from $25.7 million in the third quarter of
2001. These operating expenses increased as a percentage of revenue to 26.5% in
the third quarter of 2002 from 23.0% in the third quarter of 2001. The increase
as a percentage of revenue primarily resulted from lower overall revenue levels,
increased costs associated with the Company's French subsidiary and increased
provisions for uncollectible accounts related to the Company's CWG home water
division.
Net Interest Income (Expense). Net interest income for the third quarter of 2002
amounted to $0.5 million as compared to net interest expense of $1.0 million for
the third quarter of 2001. The increase in net interest income of approximately
$1.5 million was primarily attributable to the investment of higher cash
balances and lower short-term borrowings during the 2002 period, which resulted
primarily from the application of the proceeds from the sale of the Aqua Cool
Pure Bottled Water business, which occurred on December 31, 2001.
Equity Income. Equity income for the third quarter of 2002 amounted to $0.7
million compared to $0.9 million in the third quarter of 2001. Equity income for
the third quarter of 2002 included earnings resulting primarily from the
Company's 40% ownership interest in Desalcott and from the Company's 20%
-16-
interest in a Mexican company which owns two projects located in Mexico. The
Company also derives equity income from its equity interest in several joint
ventures in the Middle East, which engage in bottled water distribution, and to
a lesser extent from its other equity investments in affiliated companies. The
Company records 100% of any net loss and 40% of any net income reported by
Desalcott. In periods in which Desalcott has an accumulated loss (as opposed to
retained earnings), the Company records 100% of any net income of Desalcott up
to the amount of Desalcott's accumulated loss, and 40% of any net income
thereafter.
Taxes. The Company's effective tax rate for the third quarter of 2002 was 42.5%
compared to 34% for the third quarter of the previous year. The increase in the
overall tax rate was primarily attributable to an increase in forecasted losses
at the Company's French subsidiary for which the Company may not be able to
realize future tax benefits.
Net income. Net income was $0.4 million for the three months ended September 30,
2002, compared to net income of $4.2 million for the three months ended
September 30, 2001.
Comparison of the Nine Months Ended September 30, 2002 with the Nine Months
- ---------------------------------------------------------------------------
Ended September 30, 2001
- ------------------------
The Company reported consolidated revenues of $246.5 million and net income of
$3.1 million for the first nine months of 2002, compared to consolidated
revenues of $354.9 million and net income of $11.4 million for the first nine
months of 2001. Results for the first nine months of 2001 included the
operations of the Aqua Cool Pure Bottled Water business, which was divested on
December 31, 2001. In addition, results from the Company's majority-owned
Malaysian subsidiary are included in the 2001 results and have been included in
the 2002 results through the date of its divestiture in May 2002.
Revenues. Total Company revenues for the first nine months of 2002 decreased
30.6% to $246.5 million from $354.9 million from the year earlier period.
Excluding nine-month 2001 Aqua Cool Pure Bottled Water revenues of $57.6
million, nine-month revenues for 2002 were down $50.8 million, or 17.1%, from
the comparable period in 2001.
EBG revenues of $112.6 million for the first nine months of 2002 decreased by
$7.8 million, or 6.5%, compared to revenues of $120.4 million for the comparable
period in 2001. The revenue decreases over the year earlier period reflect lower
revenue levels from domestic capital equipment sales relating primarily to the
zero-liquid discharge business (partially as a result of the Company's decision
to focus on equipment-only sales with minimal installation and civil
construction scope) and other revenue shortfalls due to a shift in product mix
from capital sales projects to Company build, own and operate projects for which
revenue is derived from water sales following project completion.
UWG revenues of $75.4 million for the first nine months of 2002 decreased by
$29.1 million, or 27.9%, compared to revenues of $104.5 million during the
comparable period in 2001. This decrease primarily resulted from lower revenues
of $10.8 million from the Company's Malaysian subsidiary that was divested in
May 2002. In addition, UWG revenues for the first nine months of 2002 were
affected by the continuing softness in the microelectronics industry,
particularly with respect to domestic capital equipment sales. The Company
believes that there is a general trend in the microelectronics industry for
manufacturers to source new manufacturing facilities in Asia rather than the
United States, and the Company has consequently established a new subsidiary in
China to augment its activities in the ultrapure water market currently carried
out by subsidiaries in Taiwan and Singapore.
CWG revenues of $29.1 million during the first nine months of 2002 decreased by
$64.7 million, or 69.0%, compared to revenues of $93.9 million for the
comparable period in 2001. The decrease in CWG revenues primarily resulted from
the absence of revenues from the Company's Aqua Cool Pure Bottled Water business
that was divested in December 2001, which were $57.6 million for the first nine
months of 2001. In addition, CWG revenues for the first nine months of 2002 were
affected by a lower demand for the automobile windshield wash solution and
consumer bleach products as a result of the loss of several customers due to
price competition as well as overall lower demand for the Company's home water
treatment equipment as a result of the general downturn in the economy.
IBG revenues during the first nine months of 2001 and 2002 were $20.3 million.
-17-
Revenues from affiliated companies (i.e., entities in which the Company has a
less than majority equity interest) amounted to $9.0 million for the first nine
months of 2002 compared to $15.9 million for the first nine months of 2001. The
43.2% decrease in affiliated companies revenues reflected the substantial
completion of the capital equipment portion of the Trinidad project.
Cost of Sales. The Company's total cost of sales as a percentage of revenue for
the first nine months of 2002 was 71.5% and 70.6% for the comparable period in
2001. As a result, the Company's gross margin was 28.5% for the first nine
months of 2002 compared to 29.4% for the comparable period in 2001. EBG's cost
of sales as a percentage of revenue decreased to 74.5% for the first nine months
of 2002 compared to 75.6% for the comparable period in 2001. The decrease
reflected a change in product mix from lower margin capital equipment to spare
parts, supply, and other higher margin products. UWG's cost of sales as a
percentage of revenue decreased to 76.5% for the first nine months of 2002
compared to 77.8% for the comparable period in 2001. Excluding the operations of
the Malaysian subsidiary (which was divested in May 2002) from the results for
the first nine months of 2002 and 2001, UWG's cost of sales as a percentage of
revenue would have been 76.2% and 76.1% for the first nine months of 2002 and
2001, respectively. Cost of sales as a percentage of revenue for CWG increased
to 62.2% for the first nine months of 2002 from 56.3% for the comparable period
of 2001. Excluding the results of the Aqua Cool Pure Bottled Water business,
which was divested on December 31, 2001, CWG's cost of sales as percentage of
revenue for the first nine months of 2001 amounted to 62.1%. The increase in
CWG's cost of sales as a percentage of revenue as so adjusted was primarily
attributable to the decline in the consumer bleach unit's performance due to
unabsorbed manufacturing overhead associated with the decline in revenues. IBG's
cost of sales as a percentage of revenue decreased to 40.9% for the first nine
months of 2002 compared to 47.9% for the year earlier period, primarily
reflecting a higher proportion of more profitable after-market services and
software sales for the first nine months of 2002 as compared to 2001. Cost of
sales to affiliated companies as a percentage of revenues decreased to 91.9% for
the first nine months of 2002 compared to 98.0% for the first nine months of
2001. This decrease was primarily due to lower revenues from sales to Desalcott.
For accounting purposes, since the Company is deemed to have provided all of the
equity funding for Desalcott, profit has been deferred over the balance of the
term of the Trinidad concession agreement, which resulted in lower margins on
sales to Desalcott.
Operating Expenses. Research and development expenses remained approximately the
same at $4.8 million in the first nine months of 2002 compared to the year
earlier period. Selling, general and administrative expenses decreased 23.2% to
$62.7 million in the first nine months of 2002 from $81.7 million in the first
nine months of 2001. These operating expenses increased as a percentage of
revenue to 27.4% during the first nine months of 2002 compared to 24.4% during
year earlier period. The increase as a percentage of revenue primarily resulted
from lower overall revenue levels, costs associated with the Company's French
subsidiary and restructuring charges related to the CWG group following the
divestiture of the Aqua Cool Pure Bottled Water business. These costs were
offset by gains relating to the sale of the Malaysian subsidiary and net foreign
exchange gains.
Interest Income (Expense). Net interest income for the first nine months of 2002
amounted to $1.4 million as compared to net interest expense of $3.1 million for
the first nine months of 2001. The increase in net interest income of
approximately $4.5 million was primarily attributable to the investment of
higher cash balances and lower short-term borrowings during the 2002 period,
which resulted primarily from the application of the proceeds from the sale of
the Aqua Cool pure Bottled Water business on December 31, 2001.
Equity Income. Equity income for the first nine months of 2002 amounted to $2.4
million compared to $1.9 million for the year earlier period. Equity income for
the first nine months of 2002 included earnings resulting primarily from the
Company's 40% ownership interest in the Trinidad desalination project company,
Desalcott, and from the Company's 20% interest in a Mexican company which owns
two projects located in Mexico. The Company also derives equity income from its
interests in several joint ventures in the Middle East, which engage in bottled
water distribution, and to a lesser extent from its other equity investments in
affiliated companies. The Company records 100% of any net loss and 40% of any
net income reported by Desalcott. In periods in which Desalcott has an
accumulated loss (as opposed to retained earnings), the Company records 100% of
any net income of Desalcott up to the amount of Desalcott's accumulated loss,
and 40% of any net income thereafter.
Minority Interest in Earnings. Minority interest in earnings of $0.7 million in
the first nine months of 2002 compared to minority interest in losses of $0.3
million in the first nine months of 2001.
-18-
Taxes. The Company's effective tax rate for the first nine months of 2002 was
41% compared to 34% for the year earlier period. The increase in the overall tax
rate was primarily attributable to an increase in forecasted losses incurred by
the Company's French subsidiary for which the Company may not be able to realize
future tax benefits.
Net Income. Net income was $3.1 million for the nine months ended September 30,
2002, compared to net income of $11.4 million for the nine months ended
September 30, 2001.
Financial Condition
At September 30, 2002, the Company had $144.0 million in cash and cash
equivalents and $224.1 million of working capital. Working capital increased by
$2.2 million during the first nine months of 2002. The Company's current ratio
increased to 3.0 at September 30, 2002 from 2.4 at December 31, 2001.
Accounts payable and accrued expenses decreased $16.7 million during the first
nine months of 2002, reflecting lower revenue levels during the first nine
months of 2002 compared to 2001. Income taxes payable decreased $25.6 million
during the first nine months of 2002, primarily reflecting tax payments made on
the gain from the sale of the Company's Aqua Cool Pure Bottled Water business.
The increase in customer deposits of $10.5 million during the first nine months
of 2002 primarily reflected the receipt of advance payments on the Kuwait
project.
Net cash used by operating activities amounted to $4.6 million during the first
nine months of 2002, reflecting cash used for payments of accounts payable,
accrued expenses and current income taxes, offset by depreciation and
amortization charges of $17.3 million and by a reduction of accounts receivable
and receivables from affiliated companies of $11.9 million. Net cash used in
investing activities amounted to $23.7 million during the first nine months of
2002, reflecting additions to property, plant and equipment, primarily relating
to investments made in the UWG segment for a build, own and operate facility in
the power industry and in the EBG segment for the expansion of an existing
build, own and operate facility in Curacao. Net cash used by financing
activities totaled $10.4 million during the first nine months of 2002, primarily
reflecting the partial repayment of the Company's short-term borrowings.
From time to time, the Company enters into joint ventures with respect to
specific projects, including the projects in Trinidad, Kuwait and Israel
described below. Each joint venture arrangement is independently negotiated
based on the specific facts and circumstances of the project, the purpose of the
joint venture company related to the project, as well as the rights and
obligations of the other joint venture partners. Generally, the Company has
structured its project joint ventures so that the Company's obligation to
provide funding to the underlying project or to the joint venture entity is
limited to its proportional capital contribution, which can take the form of
equity or subordinated debt. Except in situations that are negotiated with a
specific joint venture entity, the Company has no other commitment to provide
for the joint venture's working capital or other cash needs. In addition, the
joint venture entity typically obtains third-party debt financing for a
substantial portion of the project's total capital requirements. In these
situations, the Company is typically not responsible for the repayment of the
indebtedness incurred by the joint venture entity. In connection with certain
joint venture projects, the Company may also enter into contracts for the supply
and installation of the Company's equipment during the construction of the
project, for the operation and maintenance of the facility once it begins
operation, or both. These commercial arrangements do not require the Company to
commit to any funding for working capital or any other requirements of the joint
venture company. As a result, the Company's exposure with respect to its joint
ventures is typically limited to its debt and equity investments in the joint
venture entity, the fulfillment of any contractual obligations it has to the
joint venture entity and the accounts receivable owing to the Company from the
joint venture entity.
In the second quarter of 2002, construction was completed on the first four (out
of five) phases of the Trinidad desalination facility owned by Desalination
Company of Trinidad and Tobago Ltd. ("Desalcott"), in which the Company has a
40% equity interest, and the facility commenced water deliveries to its
customer, the Water and Sewerage Authority of Trinidad and Tobago. In 2000, the
Company acquired 200 ordinary shares of Desalcott for $10 million and loaned $10
million to Hafeez Karamath Engineering Services Ltd. ("HKES"), the founder of
Desalcott and promoter of the Trinidad desalination project, to enable HKES to
acquire an additional 200 ordinary shares of Desalcott. Prior to those
investments, HKES owned 100 ordinary shares of Desalcott. As a result, the
Company currently owns a 40% equity interest in Desalcott, and HKES currently
owns a 60% equity interest in Desalcott. The Company records 100% of any net
loss and 40% of any net income reported by Desalcott. In periods in which
Desalcott has an accumulated loss (as opposed to retained earnings), the Company
records 100% of any net income of Desalcott up to the amount of Desalcott's
accumulated loss, and 40% of any net income thereafter.
-19-
The Company's $10 million loan to HKES is included in long-term notes receivable
on the Company's consolidated balance sheets. The loan bears interest at a rate
equal to 2% above LIBOR, with interest payable starting October 25, 2002 and
every six months thereafter and at maturity. Prior to maturity, however, accrued
interest payments (as well as principal payments) are payable only to the extent
dividends or other distributions are paid by Desalcott on the ordinary shares of
Desalcott owned by HKES and pledged to the Company. Principal repayment is due
in 14 equal installments commencing on April 25, 2004 and continuing
semiannually thereafter. The loan matures and is payable in full on April 25,
2011. The loan is secured by a security interest in the shares of Desalcott
owned by HKES and purchased with the borrowed funds, which is subordinate to the
security interest in those shares in favor of the Trinidad bank that provided
the construction financing for Desalcott. In addition, any dividends or other
distributions paid by Desalcott to HKES must be applied to loan payments to the
Company.
In 2000, Desalcott entered into a "bridge loan" agreement with a Trinidad bank
providing $60 million in construction financing. Effective November 8, 2001, the
loan agreement was amended to increase maximum borrowings to $79.9 million. The
Company is obligated to lend up to $10 million to Desalcott as an additional
source of funds for project completion costs once all bridge loan proceeds have
been expended. However, the bridge loan of $79.9 million and the $20 million
equity provided to Desalcott (together with the additional $10 million dollars
the Company is obligated to lend to Desalcott) have not provided sufficient
funds to pay all of Desalcott's obligations in completing construction and
commissioning of the project prior to receipt of long-term financing. Included
in Desalcott's obligations is approximately $24.2 million payable to the
Company's Trinidad subsidiary for equipment and services purchased in connection
with the construction of the facility. The Company currently intends to convert
$10 million of this amount into a loan to Desalcott to satisfy the Company's
loan commitment described above. The terms of this loan are currently being
negotiated with Desalcott. The Company currently anticipates that Desalcott will
pay its remaining outstanding obligations to the Company's subsidiary partially
out of cash flow from the sale of water and from the proceeds from new long-term
debt financing. Desalcott has received proposals for new long-term debt
financing, including a term sheet and a draft term loan agreement from the
Trinidad bank which provided the bridge loan, which it anticipates completing by
year-end. Such new long-term debt financing may not be completed on terms
acceptable to Desalcott, or at all. Moreover, although the Trinidad bank that
made the bridge loan to Desalcott has not required repayment of the bridge loan,
which matured on September 1, 2002, pending completion of the long-term debt
financing, there can be no assurance that the bank will not exercise its rights
and foreclose on its collateral, in which event the Company's equity investment
in, and receivable from, Desalcott as well as the loan receivables from HKES
would be at risk.
During 2001, the Company acquired a 25% equity interest in a Kuwaiti project
company, Utilities Development Company W.L.L. ("UDC"), which was awarded a
concession agreement by an agency of the Kuwaiti government for the
construction, ownership and operation of a wastewater reuse facility in Kuwait.
During the second quarter of 2002, UDC entered into agreements for the long-term
financing of the project, and accordingly the Company commenced recognizing
revenue in accordance with American Institute of Certified Public Accountants
Statement of Position No. 81-1, "Accounting for Performance of Construction-Type
and Certain Construction-Type Contracts." At September 30, 2002, the Company had
invested a total of $1.6 million in UDC as equity contributions and subordinated
debt. The Company is committed to make additional contributions of equity or
subordinated debt to UDC of $15.9 million over a two to three year period.
In 2001, the Company entered into agreements with Kibbutz Ma'agan Micha'el, an
Israeli cooperative society, and I.P.P.S. Infrastructure Enterprises Ltd., an
Israeli corporation, for the establishment of Magan Desalination Ltd. ("MDL") as
an Israeli project company in which the Company has a 49% equity interest. In
August 2002, MDL entered into a concession contract with a state-sponsored water
company for the construction, ownership and operation of a brackish water
desalination facility in Israel. At September 30, 2002, the Company had made a
nominal equity investment in MDL, and had deferred costs of approximately
$645,000 relating to the design and development work on the project. The Company
currently anticipates that it will invest approximately $1 million in MDL for
its 49% equity interest. MDL is currently seeking approximately $7.7 million of
debt financing for the project. If MDL is unable to obtain such debt financing,
the Company would expense all its deferred costs relating to the project but
would incur no other liability, inasmuch as no performance bond has been issued
for the project.
In January 2002, the Company entered into agreements with Baran Group Ltd. and
Dor Chemicals Ltd., both Israeli corporations, giving the Company the right to a
one-third ownership interest in an Israeli project company, Carmel Desalination
Ltd. ("CDL"). On October 28, 2002, CDL was awarded a concession agreement by the
Israeli Water Desalination Agency (established by the Ministry of Finance and
the Ministry of Infrastructure) for the construction, ownership and operation of
a major seawater desalination facility in Israel. At September 30, 2002, the
Company had not yet made any equity investment in CDL, and had deferred costs of
approximately $257,000 relating to the engineering design and development work
on the project. If CDL obtains long-term project financing, the Company's total
-20-
equity investment to be made in CDL would be approximately $8 million. The
timing of such investment will depend upon the terms of the long-term financing
agreement. Although the Company currently anticipates that CDL will obtain
long-term financing for the project by the required date in April 2003, such
financing may not be obtained. If CDL is unable to obtain such financing, the
Company would expense all its deferred costs relating to the project and any
investment the Company may have made in CDL (estimated to be approximately $0.8
million by the time of the closing of the long-term financing), and could incur
its one-third proportionate share ($2.5 million) of liability under a $7.5
million performance bond issued on behalf of CDL.
On December 31, 2001, the Company completed the sale of its Aqua Cool Pure
Bottled Water operations in the United States, United Kingdom and France to
affiliates of Perrier-Vittel S.A., a subsidiary of Nestle S.A. ("Nestle"), for
approximately $220 million, of which $10 million is being held in escrow
pursuant to the terms of the divestiture agreement. The amount of the purchase
price is subject to final adjustment based on the number of customers and
working capital levels of the transferred businesses, in each case as determined
in accordance with the divestiture agreement. The process for determining the
number of customers and working capital levels, as well as any related purchase
price adjustments, is under way. In addition, Nestle is seeking payment of
certain amounts under the indemnification provisions of the divestiture
agreement. While the ultimate amount of purchase price adjustments or
indemnification payments, if any, cannot yet be determined with certainty, the
Company currently believes that the reserves it has established for purchase
price adjustments and the escrowed amount will be adequate in all material
respects to cover the resolution of these issues. Accordingly, no additional
provision for any liability that might result from any of these matters has been
included in the accompanying financial statements for the current year.
The Company has an unsecured domestic revolving credit facility with Fleet
National Bank which expires in March 2003. Under this credit facility, the
Company may borrow up to $30 million. The Company also maintains other domestic
and international unsecured credit facilities under which the Company may borrow
up to an aggregate of $6.0 million. At September 30, 2002, the Company's total
borrowings outstanding under all of its existing credit facilities were $0.7
million.
In the normal course of business, the Company issues letters of credit to
customers, vendors and lending institutions as guarantees for payment,
performance or both under various commercial contracts into which it enters. Bid
bonds are also sometimes obtained by the Company as security for the Company's
commitment to proceed with a project if it is the successful bidder. Performance
bonds are typically issued for the benefit of the Company's customers as
financial security for the completion or performance by the Company of its
contractual obligations under certain commercial contracts. These instruments
are not reflected on the Company's balance sheet as a liability because they
will not result in a liability to the Company unless the Company fails to
perform the contractual obligations which are secured by the corresponding
instrument. In the past, the Company has not incurred any significant liability
or expense as a result of the use of these instruments.
The Company believes that its future capital requirements will depend on a
number of factors, including the amount of cash generated from operations and
its capital commitments to new "own and operate" projects, either directly or
through joint ventures, that the Company may be successful in obtaining. The
Company believes that its existing cash and cash equivalents, cash generated
from operations, lines of credit and foreign exchange facilities will be
sufficient to fund its capital expenditures and working capital requirements at
least through the end of 2003, based on its current business plans and
projections.
Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets." SFAS No. 143 provides the
accounting requirements for retirement obligations associated with tangible
long-lived assets. SFAS No. 143 is effective for financial statements for fiscal
years beginning after June 15, 2002. The Company has determined that SFAS No.
143 will not have a material impact on its financial position and results of
operations.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of
April 2002." SFAS No. 145 rescinds FASB Statement No. 4, "Reporting Gains and
Losses from Extinguishment of Debt," and an amendment of that statement. SFAS
No. 145 amends FASB Statement No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS No. 145 also
amends other existing authoritative pronouncements to make various technical
-21-
corrections, clarify meanings, or describe their applicability under changed
conditions. SFAS No. 145 is effective for financial statements for fiscal years
beginning after May 15, 2002. The Company does not believe that SFAS No. 145
will have a material impact on the Company's financial position and results of
operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002 and accordingly, the Company will prospectively determine the impact,
if any, SFAS No. 146 will have on the Company's financial position and results
of operations.
Forward-Looking Information
Safe Harbor Statement under Private Securities Litigation Reform Act of 1995
- ----------------------------------------------------------------------------
Certain statements contained in this report, including, without limitation,
statements regarding expectations as to the Company's future results of
operations, statements in the "Notes to the Consolidated Financial Statements"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" constitute forward-looking statements. Such statements are based on
management's current views and assumptions and are neither promises or
guarantees but involve risks, uncertainties and other factors that could cause
actual results to differ materially from management's current expectations as
described in such forward-looking statements. Among these factors are the
matters described under "Risks and Uncertainties" contained in the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
section of the Company's Annual Report on Form 10-K for the year ended December
31, 2001, as well as, overall economic and business conditions; competitive
factors, such as acceptance of new products and pricing pressures and
competition from companies larger than the Company; risk of nonpayment of
accounts receivable, including those from affiliated companies; risks associated
with foreign operations; risks associated with joint venture entities, including
their respective abilities to arrange for necessary long-term project financing;
risks involved in litigation; regulations and laws affecting business in each of
the Company's markets; market risk factors, as described below under
"Quantitative And Qualitative Disclosures About Market Risk"; fluctuations in
the Company's quarterly results; and other risks and uncertainties described
from time to time in the Company's filings with the Securities and Exchange
Commission. Readers should not place undue reliance on any such forward looking
statements, which speak only as of the date they are made, and the Company
disclaims any obligation to update, supplement or modify such statements in the
event the facts, circumstances or assumptions underlying the statements change,
or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Derivative Instruments
- ----------------------
In certain instances, the Company enters into U.S. dollar option contracts.
These contracts are not entered into for trading purposes. In accordance with
the restrictions set forth in SFAS No. 133, these contracts do not qualify for
hedge accounting treatment. The U.S. dollar/euro options contracts previously
held by the Company's Italian subsidiary were closed in the second quarter of
2002. The U.S. dollar/Singapore dollar option contract outstanding at September
30, 2002 was recorded as a liability in the other current liabilities ("Accrued
expenses") section of the consolidated balance sheet at September 30, 2002 and
it is immaterial. End-of-period changes in the market value of the contracts
were reflected in the selling, general, and administrative expenses in the
consolidated statement of operations. A hypothetical strengthening of the
Singapore dollar by 10% against the U.S. dollar would result in a loss of fair
market value of $0.1 million. In addition, the Company periodically enters into
foreign exchange contracts to hedge certain operational and balance sheet
exposures against changes in foreign currency exchange rates. With the exception
of the option contracts described above, the Company had no foreign exchange
contracts outstanding at September 30, 2002 and 2001.
Market Risk
- -----------
The Company's primary market risk exposures are in the areas of interest rate
-22-
risk and foreign currency exchange rate risk. The Company's investment portfolio
of cash equivalents is subject to interest rate fluctuations, but the Company
believes this risk is not material due to the short-term nature of these
investments. At September 30, 2002, the Company had $1.7 million of short-term
debt and $11.1 million of long-term debt outstanding. A portion of this debt has
variable interest rates and, therefore, is subject to interest rate risk.
However, a hypothetical increase of 10% in these interest rates for a one-year
period would result in additional interest expense that would not be material in
the aggregate. The Company's net foreign currency exchange gain was
approximately $1.7 million for the nine months ended September 30, 2002,
compared to a loss of $0.2 million for the nine months ended September 30, 2001.
The Company's exposure to foreign currency exchange rate fluctuations is
moderated by the fact that the operations of its international subsidiaries are
primarily conducted in their respective local currencies. Also, in certain
situations, the Company will consider entering into forward exchange contracts
to mitigate the impact of foreign currency exchange fluctuations.
Item 4. Controls and Procedures
During 2002, as part of the Company's continuing efforts to ensure that
information required to be disclosed by the Company in its Securities and
Exchange Commission filings is appropriately accumulated and disseminated to
allow timely decisions regarding required disclosure, the Company has been
taking various actions to strengthen its system of internal controls and
disclosure controls and procedures. Such actions were also taken to enhance the
processes by which the Company manages its various international subsidiaries,
because managing a large number of relatively small, locally managed businesses
around the world presents significant challenges.
Among the actions taken in 2002, the Company hired new personnel (including new
segment and divisional controllers and a director of accounting) to enhance the
quality of its accounting capabilities; implemented a new financial
consolidation software package; implemented a centralized bid and proposal
process; expanded the internal audit function through the use of outside
resources; and formalized certain accounting and information technology policies
and procedures. With the goal of further improving the quality and timeliness of
the information available to management, the Company is continuing to implement
measures designed to evaluate and strengthen its financial and accounting staff,
to update its accounting policies and procedures, and to improve communications
between corporate headquarters and the Company's various business locations. In
addition, following the adoption of the Sarbanes-Oxley Act of 2002, the Company
instituted a procedure requiring written quarterly certifications and
representations from the head of each business group and the local controller of
each business location, and is forming a disclosure committee to oversee the
effectiveness of the Company's disclosure controls and procedures.
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Company's "disclosure controls and procedures" within 90 days prior to the
filing date of this quarterly report on Form 10-Q. The SEC defines "disclosure
controls and procedures" as a company's controls and other procedures that are
designed to ensure that information required to be disclosed by the company in
the reports it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported, within the time periods specified
in the SEC's rules and forms. Based on their evaluation of the Company's
disclosure controls and procedures and based in part on the Company's actions
described above, the Company's Chief Executive Officer (principal executive
officer) and Chief Financial Officer (principal financial officer) concluded
that, while the Company's disclosure controls and procedures were substantially
effective for these purposes as of the date of the evaluation, the Company
should continue its efforts to further improve its disclosure controls and
procedures as described above.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the Company's internal controls
subsequent to the date of the most recent evaluation of such controls, other
than the ongoing actions described above (many of which were begun before the
most recent evaluation date).
-23-
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
None
b) Reports on Form 8-K
One report on Form 8-K was filed by the Company with the Securities and
Exchange Commission (Commission) during the three-month period ended
September 30, 2002. This report, filed on August 14, 2002, reported under
Item 9 the submission to the Commission of the certifications signed by
the Chief Executive Officer and by the Chief Financial Officer, pursuant
to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, relating to the Company's quarterly report on
Form 10-Q for the quarter ended June 30, 2002, filed on August 14, 2002.
-24-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IONICS, INCORPORATED
Date: November 14, 2002 By: /s/Arthur L. Goldstein
------------------------------------
Arthur L. Goldstein
Chairman and Chief Executive Officer
(duly authorized officer)
Date: November 14, 2002 By: /s/Daniel M. Kuzmak
------------------------------------
Daniel M. Kuzmak
Vice President and Chief Financial Officer
(principal financial officer)
-25-
CERTIFICATIONS
I, Arthur L. Goldstein, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ionics, Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/Arthur L. Goldstein
Arthur L. Goldstein
Chairman and Chief Executive Officer
I, Daniel M. Kuzmak, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ionics, Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
-26-
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/Daniel M. Kuzmak
---------------------------------------------------------
Daniel M. Kuzmak
Vice President and Chief Financial Officer